Fixers Read Online Free PDF Page B

predicated on a high level of cheap creature comforts. The privations of World War II were in the distant past, fodder for the reminiscences of oldmen. The word “rationing,” barely uttered for three decades, was once again a common usage, as lines began to form at 4:00 a.m. at gas pumps. Everything suddenly seemed inside out. The country went on year-round daylight saving time. That the same thing might happen now to the worldwide flow of money and credit seems unthinkable. But the way Mankoff spells it out, it seems not only possible, but likely.
    There’s other stuff that makes Mankoff’s gloomy picture even more dire. He thinks the Street’s going to drown in the viscous alphabet soup of “securitizations”—pools of credit instruments known as MBS, CDS, CDO, CLO, and whatever—that has been brewed in the past ten years. Deals have gotten so complicated that the parties to them often don’t have a clear picture of what they’ve bought or sold, especially when you add derivatives to the volatile mix. Mankoff thinks derivatives—options that are often generically called “swaps,” even though many are custom-tailored to fit the components of a trade—will make everything worse. He’s not alone: the multibillionaire Merlin Gerrett, easily America’s best-beloved capitalist, calls derivatives the financial equivalent of thermonuclear bombs.
    So what are derivatives—or “swaps,” as they’re often generically called? All that you and I need to know, Gentle Reader, is that they’re contracts between two or more “counterparties” that are supposed to protect price and value on one side, with the other side assuming the risk for a nice fee. Say I take a position of $50 million ABC bonds. My next step is to find someone who’ll make me whole on that $50 million should prices decline. I want to limit my risk, so I need to seek out someone who, for a price, will insure me against loss. We do a deal, then what usually happens next nowadays is that the person from whom I bought protection goes and buys protection on the protection he sold me. And so on and so on, round and around and up and down, until you’re lookingat a pyramid of offsets and make-wholes balanced precariously upside down on its tip. You can imagine what happens if my original $50 million position craters. Crash!
    From what I’ve heard, a key element of these swaps deals is that they’re designed to make it difficult to figure out exactly who’s obligated to whom, under what circumstances, and for how much. Mankoff says a ton of swaps-backed loans have been made to cities, towns, and educational establishments with the assurance that they’re buying safety when, depending on the way interest rates move, they could be taking on a lethal degree of risk. These borrowers have no idea of what their potential liability might be if the markets experience a serious sell-off and chain letter turns into chain reaction.
    The big problem, according to Mankoff, is that it used to be that the collateral supporting the overnight loans that the banks use to finance their term lending and other operations was good as gold: U.S. Treasury bills and notes, sometimes gold itself. Lenders could cash in that collateral instantly if they had to. But in the frenzy of the last few years, these overnight loans have come to be supported by collateral that incorporates many more degrees of risk than Treasuries. Mortgage-backed paper, auto loans, credit card receivables, stuff like that. Security a lender can’t “realize on” by snapping his fingers. Stuff that could lose 10 percent, 20 percent of its value overnight, maybe more, maybe to the point where no one will bid for it or lend against it.
    He let me digest that, then added, “And that doesn’t cover the worst part.”
    “Which is?”
    “God help us if this credit crisis goes retail.”
    “What do you mean, ‘retail’?”
    “All the debt individuals have taken on to bridge the gap between the